The impact of fiscal policy

Politicians talk about fiscal policy as if it were a business strategy for the
country. But government is nothing like a business. The state doesn't earn
anything. Instead, it confiscates its money from people in the form of tax. It's
subject to none of the constraints and competition a normal business has to
contend with. All fiscal policy means is how the Government taxes us and how
it spends the money.

However, like any person or business, governments borrow and spend for two
principal reasons: either to produce or to consume. The most obvious form of government consumption is when the state transfers
money to people in the form of pensions and benefits. Spending on health and
education can also consume money, especially when it fails to deliver
improvements. The bottom line is that borrowing to fund this kind of expenditure
won't pay for itself. When the cash is spent, it's gone and can only be repaid
with higher taxes.

Public investment

Alternatively, when government spends money productively it invests in things
like roads, railways, energy generation and communication networks. Investment in
capital infrastructure like this is commonly associated with higher economic
growth and output. It can help to facilitate trade and promote economic activity
in the private sector, where a nation's wealth is created. In other words,
borrowing to produce can pay for itself.

The bad news is that we're doing the opposite. Public spending is set to rise
by £119 billion between 2008 and 2011. Just 6% of this is associated
with capital investment. Another 38% is a result of higher social security bills
during recession and the dead money of debt interest. This leaves the
remaining 56%, which the Government is willfully borrowing to fund yet more
unproductive consumption.

Borrowing to consume means that once the money is spent, we have to borrow
more just to stay afloat. No wonder the national debt is getting out of control.
We need to get a grip on public spending and start living within our means.